Policies to alter the use of alternative financial services
By Leighton Walter Kille
Firms such as check-cashing companies and payday lenders allow customers who don’t have bank accounts to cash checks, wire money or pay utility bills. While convenient, such services come at a cost. Payday loans typically cost 18% for a two-week term, the equivalent of 468% annually.
A 2008 paper from the Brookings Institution, “Public Policies to Alter the Use of Alternative Financial Services among Low-Income Households,” looks at options for moving disadvantaged individuals to the banking system. After examining reasons alternative financial services are used, the author outlines public-policy approaches to increasing participation in financial mainstream.
The paper’s finding include:
- Giving financial institutions incentive to provide banking services to low-income households. These can include “starter” accounts with low minimum balances and debit cards as well as inexpensive short-term loans that compete directly with payday lenders.
- Encouraging employers to require direct deposit of paychecks.
- Requiring that public assistance benefits be provided through bank debit accounts rather than paper checks. These accounts, which should be retainable after assistance ends, reduce costs and also help individuals establish relationships with banks.
- Expanding the ability of the IRS to provide tax refunds through electronic debit accounts, which often go on to be used for other purposes as well.
- Encouraging increased savings rates through employer savings plans and other methods.
- Increasing access to affordable health insurance plans, which would reduce unexpected expenses and with them the demand for alternative financial services.
- Providing education on personal financial management to low-income households.
Beyond reducing barriers to mainstream financial institutions and encouraging their use, the author points to the importance of income stabilization to reduce the attraction of high-cost alternative financial services. These include policies that encourage full employment, promote the use of unemployment insurance when necessary and expand earned-income tax credit for families with dependent children.
Tags: ethics, poverty, consumer affairs
Last updated: July 12, 2009
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Citation: Blank, Rebecca M., "Public Policies to Alter the Use of Alternative Financial Services among Low-Income Households", Brookings, April 16, 2008, Paper.